Toniic Guiding Principles for the Impact Wealth Management Relationship
Goals, Assumptions and Philosophies
The purpose of wealth can be greater than infinite preservation and growth.
We seek an advisor who understands the purpose and meaning we derive from using our wealth for good, not merely to accumulate more wealth.
Toniic and The ImPact are members of the Coalition for Impact, which sponsored a systems map of the private wealth system. See this eight minute video walkthrough of the map for an introduction, or this slide deck that describes the elements in more detail.
As this white paper of the Ownership Project 2.0 published by the Skoll Foundation describes, most wealth advisors assume their client’s goal is some variation of “preserve and grow” the assets infinitely. This is reinforced by a business model based on a percentage of AUM (see below), which creates a conflict of interest for clients who wish to downspend or reduce/stop accumulating wealth while focusing on creating greater social/ environmental good.
Most of our members have different goals for at least some portion of their personal and/or philanthropic wealth. Some have engaged in a process of defining an “Enough Number”) (see The Enough Project), which is an upper bound of wealth they seek to retain for themselves and heirs. The remainder they seek to devote to caring for the world as effectively as possible.
We seek an advisor who deeply understands using wealth for more than comfort maximization, status enhancement, inheritance legacy, or simply to accumulate more wealth. We derive meaning, purpose and value from using wealth to improve the state of the world, both now and for future generations.
Incorporating impact requires rethinking capital allocation.
We seek an advisor who understands what it takes to incorporate impact across the portfolio.
The inclusion of impact in portfolio construction adds another dimension on top of traditional portfolio construction constraints. We seek to be on the “efficient impact frontier,” which means that we accept subcommercial returns in some investments in order to achieve greater impact, as conscious tradeoffs aligned with our stated goals.
Different asset classes offer different risk, return, liquidity and impact characteristics. Different strategies and portfolios across our wealth may have a different mix of goals and possibilities. We need the flexibility and support to have nontraditional strategic asset allocations (e.g. greater allocations to private investments).
We see ESG, impact and systemic investing as requiring different approaches.
We seek an advisor who understands the differences between ESG, impact and systemic investing approaches and can facilitate the deepest expressions of impact available to different buckets of capital.
We think of “sustainable investing” as a broad umbrella covering ESG, impact and systemic investing, each of which is a distinct approach. We distinguish between values alignment (investing only in “good” companies – enterprise contribution) and causing something to happen with our capital that otherwise would not (investor contribution). For an understanding of these terms, see impactfrontiers.org. We prioritize investor contribution, yet recognize it is less achievable in certain asset classes and strategies.
We see systemic investing as a subapproach within impact investing. We are cognizant of the differences between investing for systems change, as defined by TransCap or TWIST, and the more institutional risk-mitigation approach to systemic investing of TIPP. Since the practices within systemic investing are emergent, we seek an advisor willing to experiment with us..
We expect an open and curious approach to co-learning. We expect our advisory team to be fluent in these concepts and to actively contribute to our ability to meet our goal of increased impact and specifically investor contribution, subject to our expected return, risk tolerances, tax and liquidity requirements. We seek in our advisors educated thought partners who know as much or more about impact investing and philanthropy as we do, to wrestle together with thorny, emergent issues, while handling the day-to-day deployment as seamlessly as possible.
We define fiduciary duty to include a long time horizon and consideration of externalities.
We seek an advisor who is able to honor a holistic definition of fiduciary duty.
We reject definitions of fiduciary duty (or its functional equivalent in civil law countries, such as principles of good faith and obligations of loyalty and prudence) that neglect all non-financial goals of the asset owner. Specifically, we do not wish to work with an advisor who says “we cannot help you do that because of our fiduciary duty obligations.” Our approach to the concept of fiduciary duty has a longer time horizon, and includes externalities like a liveable planet for future generations, such as characterized by the STEP Responsible Stewardship Toolkit. We hope for advance clarity on the degree to which advisors feel their “hands are tied” in this regard due to compliance requirements, and what therefore may be off-limits despite the stated wishes of a specific client.
We want an Investor Policy Statement (IPS) that incorporates both financial and impact goals.
We seek an advisor able to implement Investor Policy Statements that incorporate both financial and impact goals.
Different firms provide differing degrees of flexibility in Investor Policy Statements. We are not seeking to shift risk from ourselves to the firm, but rather, to incorporate both financial and impact goals, sometimes with varying mixes for different parts of the portfolio. We need flexibility in an advisor’s IPS model to achieve this.
Traditional benchmarks exclude important societal costs.
We seek an advisor who can help make these costs visible to us.
Classic benchmarks are tied to indices that exclude all externalities. We all manage to what we measure. If reporting shows only financial performance relative to the broad market, that is what we will collectively manage to.
Alternative benchmarks exist that, for example, exclude fewer externalities and reward companies practicing carbon reduction, diversity, alignment towards specific UN SDGs, etc. If a report incorporates impact alongside financial outcomes, the reward system may shift toward impact.
Yet the adoption of alternative benchmarks has been difficult and slow. Further, some of us value a comparison of impact and traditional benchmarks as an indicator of the “price of impact.” Since this is a difficult area with some disagreement about the best path forward, we seek thought partnership and willingness to experiment on the best implementation for our specific concerns.
Don’t assume tax optimization is always our goal.
We seek an advisor willing to question the assumption that every financial decision of the client should seek to reduce taxes owed.
Tax optimization is often a pillar of traditional wealth advisory, with the goal of maximizing client wealth. Some of us tax optimize to maximize the net amount available for impact and ability to take additional impact risks with capital earmarked for philanthropy rather than keeping as much as possible for family or personal gains. Others (e.g. see Patriotic Millionaires) go further and question tax optimization as a goal, seeing systematic tax optimization as working against our larger goals. As with the “preserve and grow” assumption, we seek an advisor who is willing to explore the goal of tax optimization with us.
We want to invest in the real economy, not financial engineering.
We seek an advisor who can distinguish between investments in the real economy and investments in derivatives and other financially engineered products.
Impact investors often have a preference to invest in the real economy, not in financially engineered derivatives and products. Those engineered products are breathtaking in creativity and complexity, but often not (in our view) positive for the world. We do not wish to participate in further “financialization” of the real economy.
Instead, we are inviting the application of creativity towards, for example, making nature investable without relying on extraction, preserving biodiversity, ensuring the long-term financial sustainability of local regenerative food systems rather than scaling them up into modern agribusiness, developing ways to invest in the unpaid care economy, etc. These challenges are ripe for the brilliant minds of financial engineers, and we invite, welcome and wish to support that aspirational thinking.
We also wish to avoid opaque and nested investments, such as found in some private credit funds and Collateralized Debt Obligations. This includes off-balance sheet debt, and investments in funds that invest in other funds without describing themselves as fund-of funds and without disclosure of the magnified risks (both fund-specific and systemic) of interlocking investments.
Capacities
We desire holistic and integrated services across the capital spectrum.
We seek an advisor who treats all our capital as a whole and as equally important, providing seamless access to expertise from philanthropy to commercial capital, whether housed within a single firm or assembled across firms.
We are both investors and philanthropists. We seek integrated philanthropic consulting on an ongoing basis, helping us decide what kind of capital is most appropriate for particular goals. We are open to that being provided within or across firms, provided the service is truly integrated.
We expect sophisticated, integrated, strategic philanthropy consulting. This includes several elements:
- bringing an impact rather than an egocentric framework for both cause area prioritization and evaluation of opportunities
- ongoing re-evaluation and management
- expertise on regional implementation mechanisms such as private foundations, Donor Advised Funds, Limited Liability Companies, etc. (the availability of which varies by jurisdiction)
- advice on the deployment of our non-financial resources that can have a positive impact (in the career, social, and political domains)
- Sustained support in measuring philanthropic effectiveness
Fundamentally we seek integrated expertise across the full spectrum of impact capital (not necessarily from a single advisor), including grants, recoverable grants, catalytic/concessionary investing, and commercial rate investing, and a fee structure that doesn’t incentivize any one over the others.
Impact requires fluency in non-traditional capital structures.
These include recoverable grants, revenue-based financing, ESOPs, co-ops, purpose trusts, and mission-preserving ownership transitions.
Companies with impactful missions are vulnerable to those who would reduce the impact to increase profits. We seek to use our role as investors to defend against these risks. This can take many forms:
- Structuring our investment in forms other than traditional debt or equity – e.g. using revenue-based financing or recoverable grants.
- Pressuring companies to ensure mission preservation both prior to and during potential ownership transitions.
- Investing in non-traditional capital structures (ESOPs, Co-operatives, and purpose trusts)
We want an advisor that is fluent in these techniques, including their availability, constraints and relative strengths and weaknesses in specific jurisdictions.
Asset Classes
Private investments are essential to impact and benefit from diversity in managers.
We seek an advisor with deep expertise in sourcing and diligencing private assets in various asset classes, with an open-architecture to support diligence of opportunities we source, and with comprehensive management of capital calls, distributions, performance reporting and tax compliance.
As impact investors we tend to have larger than traditional allocations to private equity, venture capital, private debt, real assets, and revenue-based finance asset classes. We seek to avoid excessively extractive financial structures within these asset classes.
We source many high-impact private co-investment opportunities through our peer membership networks. Some of these are commercial rate, others are catalytic capital (a.k.a. “impact first”). We need particular expertise in private impact investments. We are open to creative ways you might provide the following capabilities, but these are capabilities most of us need:
- Sourcing and awareness of opportunities in different impact themes (cause areas).
- Private markets diligence capability covering a substantial portion of the available market relevant to our target geographies.
- Ability and willingness to diligence funds and direct deals we bring to you (at an additional cost, if necessary)
- An architecture that allows for consolidated reporting and management of private investments not sourced through your firm, as well as legacy holdings.
- Comprehensive management of capital calls, distributions, performance reporting and tax compliance.
We are open to some of these aspects being subadvised, provided there is not an extra layer of fees without value.
Some of us seek to support emerging and diverse fund managers who do not meet the typical threshold criteria for inclusion for consideration on advisors’ platforms. Some members are signatories to the Due Diligence 2.0 Commitment (most relevant in the U.S.),, which includes a commitment to considering track record alternatives. We seek an advisor who will support these alternative approaches when requested and in line with our IPS, and the ability to apply the principles of this model outside the United States, including providing different and regionally relevant approaches to diverse and emergent managers.
Impact in public markets requires engagement.
We seek an advisor committed to engagement, including participating in voting blocks, shareholder coalitions, and even sponsoring shareholder proxy resolutions.
We are skeptical of the additionality of owning ESG-screened funds. On its own, such funds may achieve values alignment, but not investor contribution.
The lowest bar for engagement is proxy voting, yet many advisors either disclaim any responsibility to facilitate proxy voting, do so only in accordance with conventional proxy voting guidelines, or their practical implementation of proxy voting is cumbersome. We seek to assert our ownership rights. We need the ability to vote our shares in alignment with sustainability voting guides such as As-You-Sow or ISS Sustainability, and shareholder coalitions. Some of us wish to be even more active as filers or co-filers of such resolutions.
Cash is an underutilized impact asset class.
We seek an advisor that facilitates access to impactful cash solutions.
Many of us hold cash not needed for immediate liquidity and would prefer that cash be deployed for greater impact. The structure and availability of impactful cash solutions varies greatly by jurisdiction, such as Community Development Financial Institutions (CDFIs) in the U.S., and we seek relevant expertise for our regions of interest.
Fee Models
Aligned fee models would benefit both wealth managers and investors.
We seek an advisor with openness to alternatives to the AUM (cross-subsidy) fee model. Our goal is aligned, not lower, fees – we want our advisors to have sustainable business models in which the incentives are long-term and as impact-focused as financially-focused, and fees are reflective of the cost of delivery.
The “percent of Assets Under Management” fee model is deeply entrenched in the wealth management business. We understand the appeal, and the challenge of developing alternatives. We also see the conflicts of interest inherent in that model for investors not fully committed to the “perpetual preserve and grow” paradigm, and who most value services beyond public markets fund management. While acknowledging the dominance of the paradigm, we are seeking to identify firms willing to experiment with us.
This is not motivated primarily by an effort to reduce fees. Rather, the greatest value delivered to us by wealth advisors is not well reflected by an AUM compensation model, in which fees on low cost-of-service public markets management subsidize other services.
We desire transparency about internal incentives.
We seek an advisor willing to be transparent about internal incentives – including bonus criteria, scorecards, and incentives for internal business referral and proprietary product sales, as well as any incentives to prioritize impact.
We are not seeking to dictate your compensation practices. We are seeking to understand them, and the potential effect they have on the advice we receive in light of our specific goals.
Our Responsibilities as Clients
We are asking you to adapt to better meet our needs. We are willing to do our part.
We will pay appropriately for specialized work we ask advisors to do, including impact measurement.
We are keen to understand your cost of service, and to pay a reasonable margin on top of that cost so that you may both reward performance and make a profit.
We understand that services outside of public markets management are more expensive to provide. This includes impact measurement and management, which has a cost which those desiring it should pay.
We will continually interrogate and communicate our return and impact expectations.
It is our responsibility to continually question our priorities, to resolve conflicting goals, and to communicate those in a timely and clear manner.
We cannot outsource clarity on our goals, nor hold you to conflicting standards. We value your expertise in guiding our thought process, but assume ultimate responsibility for developing and communicating clear goals.
We agree to document our goals and expectations clearly in our IPS.
We understand concerns about compliance and liability, and are keen to partner to reduce any risks you perceive in meeting our goals.
For example, if our Investor Policy Statement expresses an allocation to sub-commercial returns, or to ceding some investment decision making authority, let’s partner to assure you face no liability or regulatory risk for honoring those wishes.